A sharp pick-up in services activity in February to a three-year high - shown by the purchasing managers' survey - indicates that January's slowdown was weather-related and that the sector's upturn remains intact.

The business activity index picked up to 58.4 in February from a five-month low of 54.5 in January and boosted hopes that the economy can build on its return to growth in the fourth quarter of 2009.

However, it is important not to get too carried away, according to Hetal Mehta of the Ernst & Young ITEM Club.

'An array of short term factors - such as the car scrappage scheme and the turning of the stock cycle and the impact of the VAT increase - have underpinned the recent upturn.

'Once these effects fade and the fiscal squeeze kicks in, the pace of recovery could slow, and we will see a patchy recovery. GDP growth of much over 1% this year still looks optimistic.'

The Bank has recently expressed concerns about the strength and sustainability of the economic recovery. The fact that GDP growth in the fourth quarter of 2009 was last week revised up to 0.3% quarter-on-quarter from an initial 0.1% will not go far to assuage those concerns.

Revisions to earlier data means that the recession was actually even deeper than previously thought: a 6.2% contraction from the peak in the first quarter of 2008 to the trough in the third quarter of 2009.
Bank Governor Mervyn King told the Treasury Select Committee last week that he thought the 'risks to the MPC's central view of a gradual recovery of output remain to the downside'.

Uncertainty about fiscal policy is also clouding the picture. The election is due by June at the latest and recent opinion polls have pointed to a hung parliament, where no party has an outright majority.

Fears an incoming government will struggle to take the tough action needed to curb the budget deficit sent sterling to a 10-month low against the dollar at the start of this week.

Renewed weakness in the pound could put upward pressure on inflation which, at 3.5% in January, is running well above the central bank's target. However, the BoE is confident that it will fall back below the target level of 2.0% during the second half of 2010.

Howard Archer of IHS Global Insight reckons there is little likelihood that the Bank will raise interest rates any time soon.

'Indeed, if the Bank does act in the near term,' he said, 'it will most likely be to resuscitate its quantitative easing programme, having halted it in February after spending £200bn mainly on gilts.

'We expect the Bank of England to keep interest rates down at 0.50% not only on Thursday but through 2010. It is likely that the economy will go through many more twists and turns over the coming months.'

Mehta agrees that 'We do not expect the Bank of England to make any changes to its policy stance when it meets.'